Credit cards can be a powerful financial tool, but they often come with misconceptions that can mislead users, especially in emerging markets where credit is a relatively new concept.
Let’s clear up some of these myths to help you make the most of your credit card and maintain a healthy financial profile.
Myth 1: Carrying a Balance Improves Your Credit Score
The Truth: Carrying a balance on your credit card does not improve your credit score.
Credit scores are calculated based on several factors, including your payment history and the amount of credit you’re using relative to your credit limit, known as your credit utilisation ratio. By carrying a balance, you risk increasing this ratio, which can negatively impact your score. Finally, carrying a balance means you’ll be paying interest on the amount, which can quickly add up and lead to significant debt over time.
Myth 2: Closing Unused Credit Cards Boosts Your Credit Score
The Truth: Closing unused credit cards can actually harm your credit score.
Your credit utilisation ratio is a very important component of your credit score. This ratio compares your total credit card balances to your total credit limits. When you close a credit card, you reduce your available credit, which can increase your credit utilisation ratio if you have outstanding balances on other cards.
Instead of closing unused credit cards, consider keeping them open and using them occasionally for small purchases that you can pay off immediately. This strategy keeps your credit limit high and your utilisation ratio low, both of which can positively impact your credit score.
Myth 3: Checking Your Credit Report Hurts Your Score
The Truth: Checking your own credit report does not hurt your credit score.
There are two types of credit inquiries: hard inquiries and soft inquiries. Hard inquiries, which occur when a lender checks your credit for a loan or credit card application, this can impact your score. However, soft inquiries, such as checking your own credit report, have no effect on your credit score.
Regularly checking your credit report is essential for monitoring your credit health and catching any errors or signs of identity theft early.
Myth 4: High Credit Limits Are Bad
The Truth: High credit limits are not inherently bad. In fact, they can be beneficial if managed responsibly.
A higher credit limit can positively impact your credit utilisation ratio, as long as you don’t increase your spending. This ratio is a significant factor in your credit score, so keeping it low by having a high credit limit and low balances can be advantageous.
Having a high credit limit requires self-discipline. It’s important to maintain responsible spending habits and not view the high limit as an invitation to overspend. By balancing a high credit limit with careful spending, you can enjoy the benefits without falling into debt.
Understanding the realities of how credit cards work can help you make smarter financial decisions. By debunking these common myths, you can use your credit cards to build and maintain a strong credit profile, avoid unnecessary debt, and achieve your financial goals. Remember, responsible credit card use is key to a healthy financial future.
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